Tax Refund Decisions
Rosemary K. Heins, Extension Educator — Family Resiliency
Revised April 2017, Sharon Powell, Extension Educator — Family Resiliency.
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A tax refund is a welcome bonus. Whether it is $300 or $3,000, the way you use that money can have a real impact on your personal and financial well-being. Want a new computer? Better car? Flat screen TV? Those items are attractive but it's important to consider whether desired purchases are a good decision in the long run.
Strategies for Using Your Tax Refund Wisely
Here are some strategies to follow to ensure that you make the best tax refund decisions for you and your family.
- Plan ahead before spending. Without a plan, you may spend impulsively, using the money on the first thing that comes to mind and later realize something else was more important. Before you spend, take a moment to write down all the possibilities and identify which are the most important at this moment for you and your family.
- Pay off bills. Your first priority should be monthly bills for needs (utilities, phone, etc.) you have gotten behind on. Prioritize your other debts so that the ones with the highest interest rate get paid off first.
- Save for needs in the coming year. Set money aside to help you cover potential emergencies or occasional expenses.
- Emergency Funds — Having money saved for emergencies can get you through small emergencies like a car repair or medical expense. If you lose your job, an emergency fund can keep you afloat until you find another income source.
- Occasional Expenses — Big bills that come once a year or every few months cause huge problems for families. Avoid problems by being ready for the bills! Use your tax refund to start a special savings fund and then keep adding to it throughout the year.
- Save for short- and long-term financial goals. Do you need a new refrigerator? Is a holiday coming up? Purchases like this are valuable too. Some may be essential, while others simply add enjoyment to life.
- Save for long-term financial security. You can make progress toward your overall financial security using your tax refund! Even small amounts can make a difference. Adding just $500 a year into a retirement account such as an IRA can make a difference over a period of decades. Take the "small amount" plan one step further by making a monthly contribution if your budget allows for it. If you contribute $500/year and $25/month, earning 9% return, in 30 years you will have $113,800!
More Tax Refund Considerations
Here are some more things to consider about tax refunds:
- Use direct deposit to receive tax refunds fast.
- Have the IRS help you with your saving goals by arranging for them to split your direct deposit refund into up to three different accounts. These could be checking, savings, health savings, retirement, or education savings accounts. For more information, see Form 8888: Allocation of Refund (Including Savings Bond Purchases) on the IRS website.
- Never have a tax refund deposited into a bank account other than your own.
- Asking for an advance on your tax refund carries a heavy surcharge. Do not throw away part of your refund on loan fees.
Iowa State University Extension. (2012, November). Smart uses for your tax refund. Ames, IA: Iowa State University Extension.
National Endowment for Financial Education. (2016, March). 6 money-smart uses for your tax refund. Sam Says Newsletter.
It's Your Money. Now Claim It! — Center on Budget and Policy Priorities — Materials about the EITC, Child Tax Credit, free low-income tax preparation assistance and other resources including promoting saving and asset development opportunities. Some fliers available in 21 languages.